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Last night I had the great privilege to interview Bill Gross, one of the Internet’s true pioneers.
To say he has had an impact on the web would be an
understatement. His impact has even helped a small country gain
admission to the United Nations. All of that are in this week’s episode of This Week in VC. Summary
notes, as always, provide below. It was a pleasure to write them
myself.

Overture (Goto.com)

He invented the category of sponsored search. He presented the
idea at the TED conference in the mid 90′s and was literally
boo’d while he was on stage. I thing I’ve learned over the years
is that technology purists hate advertising even when it is that
revenue stream that truthfully drives much of our industry.

He created GoTo.com (later renamed Overture) out of a frustration
with search. At the time when you did a search on Lycos, Alta
Vista or similar for a category such as Cars you ended up getting
9 spam results and 1 proper website to meet your needs.

The idea actually came to him from the Yellow Pages business. He
was a life-long entrepreneur and the first business he created
out of college (actually, he founded it while he was at Caltech)
was a company that manufactured high quality audio speakers. He
took out an ad in the Yellow Pages (it was the early 80′s, pre
Internet), which cost him $1,000 / month for a half-page ad.

He was skeptical of spending the money but astounded at what a
transformational impact it had on his business. What he realized
was that the full pages ads were displayed first (say for 3-5
pages) then the half page ads (another 3-5) then the quarters,
the eighths. So the Yellow Page business was always “pay for
placement.”

Bill’s rationale was the more serious your business was, the more
you could afford to pay for placement and therefore the more
likely it was for consumers. If it worked in the Yellow Pages,
why not on the Internet?

So he launched a company with exclusively paid search. He said it
was better than the Yellow Pages because he would provide pricing
transparency. Users would know exactly how much was paid for each
click.

Heresy.

Google was clear that they WOULD NOT go into this business.
Amazon was planning on working with GoTo.com but actually pulled
out just before launch. Not because they didn’t want to do
Pay-per-click (they are huge buyers of SEM) but because they
didn’t want other people to know what they paid for clicks! Funny
story, after Bill presented at TED (back when Amazon was still a
small company) Jeff Bezos was in the audience. He came up to Bill
after the event and said, “clever idea, we should do that with
you.” Immediately thereafter Amazon became a large business.

GoTo.com went on to ink huge distribution deals with Microsoft,
AOL & Yahoo! – the biggest Internet portals of the day. They
were a juggernaut and Google was a small company. Overture was sold to Yahoo! for $1.63 billion
– not a bad result, hey? But obviously Google won the war. Bill
attributes to two primary reasons. Mostly, Google just had way
better organic results (“the loss leader”) so it was always
preferred by consumers. Secondly, they had an owned &
operated (O&O) website – Google.com – and Overture had shut
down GoTo.com at the request of their very profitable and large
distribution partners. That gave Google a huge cost advantage.

IdeaLab

In 1995 Netscape IPO’d and browsers started to become more
prevalent. Bill had previously created a packaged software
company called Knowledge Adventure the produced children’s
educational software. He wanted to build direct customer
relationships to get product feedback but only 2% of customers
would ever return their registration cards.

So when he saw the browser it instantly dawned on him that this
would be the greatest customer development tool ever. He thought,
“This way any product you launch you can talk instantly with and
get feedback from customers.” He had the idea that people would
want city guides to tell them where to eat and what to do. So he
founded … wait … CitySearch. Yes, long before
Yelp or any similar service.

From here he realized that he was full of ideas and if he could
attract people to come and run companies based on his ideas he
could generate a lot more companies. So he founded IdeaLab with
his wife Marcia Goodstein (he talks in the video about working
with a spouse and also working with siblings). As an outsider who
has observed them together in action I can say that they seem
both very complementary in skills sets
& temperaments and to make it work they have to be
very respectful of each other’s opinions and skill sets.

IdeaLab has created 75 companies, leading to 8 IPOs, 35 or so
acquisitions and more than 5 companies worth in excess of $1
billion. And when I say this I don’t mean they funded billion
dollar companies – they literally created them. Some IdeaLab
successes / brand names aside from Overture & CitySearch?

eToys

Shopping.com

The Wedding Channel

Commission Junction

Cars Direct / Internet Brands

Picasa

Snap

Insider Pages

eSolar

X1

And now, of course, UberSocial, Bill’s latest project.

And while they historically had come up with 100% of their ideas
and created the companies themselves, they are increasingly open
to funding people with great ideas who want to build businesses
with IdeaLab provided the companies will stay be in LA (and
preferably Pasadena). They are very hands on. In fact, IdeaLab
employees around 50 people who are not necessarily dedicated to a
single company.

IdeaLab has a philosophy that if they can get a centralized group
of expert staff to help with legal, accounting, recruiting, PR,
etc. they can build teams that really focus on building &
marketing great products. This has been their formula for nearly
15 years.

Bill believes that most of the best business ideas come from
people solving personal problems that they have in their every
day lives. Almost every business he’s ever launched has been
this. I totally agree. I’ve talked about this often – the biggest
mistake I made in my first company was going into an industry for
which I wasn’t passionate.

He made a comment that really resonated with me, “You need to
make sure your product is 10x better than that of your
competitors. First, you’re probably exaggerating how much better
it is. But also when you’re developing so is your competitor. So
if you shoot for 10x better you might hit 3x better and that’s
super important to win.”

Too many entrepreneurs focus on dilution. Bill thinks that
most companies your success is usually binary. So the most
important thing is to surround yourself with people who can help
you succeed. Make sure they’re as passionate about your space as
you are (and have strong knowledge of your area). But
over-optimizing for dilution is a bad attribute relative to
focusing on creating a big & winning company. I further that.
My point of view is that most Internet markets create “winner
take most” outcomes where the largest player is super successful
and disproportionally less for everybody else. Think YouTube vs.
the rest.

Bill’s a huge believer in MVP. When he tells his stories from
the 1990′s your realize that he was probably the original “lean
startup.” They would give companies $250,000 to launch their
products. They would launch quickly and test whether or not there
is any demand. If there was, they would green light the project
and if not they were likely to shut it down & move on to the
next project unless the team was super passionate about
continuing. Almost sounds YCombinator-esque.

Test monetization early. You can fool yourself into believing
that there is inherent value in your product but you only really
know when somebody has to get out a credit card and part with
hard-earned money.

Don’t think about starting an incubator until you have real
operating experience otherwise you don’t really have anything to
offer startups. Bill had been an operator for more than 15 years
and had had 2 successful companies before ever launching IdeaLab.
I commented that many young entrepreneurs I talk to these days
have a desire to “go plural” and create an incubator. I think
this makes no sense. When I look at the very successful people
doing this like IdeaLab, YCombinator, TechStars or Betaworks –
they all have deep operational skills and prior successes.

We talked about patents. Bill doesn’t think you should over
invest in them but he does believe in protecting ideas when you
have a true invention and many of his companies have done so. I
brought up the fact that I find many larger companies abusing the
patent system to slow down smaller competitors which is actually
anti competitive. We had a nice discussion on this topic.

In the video Bill talks about how he started his first
entrepreneurial venture at 12 doing a mail-order business (very
Tony Hsieh of Zappos who did the same thing). His first “real”
business came in college where he designed audio speakers. He
sold so many that after Caltech he decided to open a retail
store. It’s still there 30 years later!

He bought a copy of Lotus 1-2-3 (a predecessor to Excel for
those youngens) and programmed his own accounting software for
his business. Yet again, he was solving for his own needs. He
turned his accounting software into a product he could see. He
loved it because where speakers you could build a product for
$400 and sell it for $500, with software you could build it once
and have almost no variable costs going forward. Lotus loved it
so much they bought the company and Bill went to work there for 6
years.

Bill tells an excellent story about how IdeaLab became the
first company to buy and own it’s own TLD (top-level domain) when
they negotiated to buy the .TV domain from the tiny island of Tuvalu. They generated about $50
million for the island, which was transformative in building
hospitals and infrastructure. It also is how they financed their
entry into the United Nations. This is a great story – best if
you hear Bill tell it.

Anyway, we discussed so much more. I don’t have time to type out
all the notes. But if you have some spare time and want to hear
from one of the most innovative (in the truest sense of the word)
people you’ll ever hear from – I think you’ll enjoy watching this
episode of This Week in VC.